What is gold’s true value? Both the FT’s Lex column and The Economist have had a crack at answering this in recent weeks.
The Economist uses an elaborate method of taking the gold price in a range of currencies ‘backed by a sound balance sheet’, including the Canadian loonie and the Swiss franc, and comparing the current price to the historical average. Even against the ‘safe haven’ of the franc, gold is overvalued by 60% on this basis. Lex is less thorough. It notes the “price is still about 30% below its January 1980 peak, adjusted for inflation”. But then again, it adds, there’s “no reason for gold to sell at any particular price”.
What both publications share is a belief that gold is in a bubble. Underlying this is a sense that there’s something irrational, or even plain stupid, about owning gold. I find this fascinating. I think we can all agree that the world needs a medium of exchange – otherwise we’d still be bartering with one another and we’d never get anything done. And of all the raw materials out there, from copper to cocoa beans to cockle shells, gold is the best option. It’s durable, there’s not a lot of it around, and it’s not useful for much else (this lack of utility is the main reason gold is a better monetary metal than silver).
One thing it’s not is convenient. That’s where paper and electronic money score over gold. But there are times when people are willing to sacrifice convenience for safety, and right now – with every major currency in the world either valued at historic extremes (such as the ‘safe havens’ of the Swissie and the yen) or under threat of extinction (like the euro) – is one of those times.
Now, I’m not saying that gold is a sure thing, or that the market is incapable of ever forming a bubble. It’s happened before and will happen again. I don’t think it’s there yet, but the wider acceptance of gold by bank analysts is a sign that it is now mainstream. And owning nothing but gold would be silly, in the same way that investing 100% of your portfolio in oil or tech stocks or British property would be.
But what I can’t understand is this stubborn intellectual conceit that investing in gold at all is irrational. As David Fuller of Fullermoney notes in response to The Economist piece: “Trust is far more important than any fundamental metric for evaluating gold, and people have learned, or relearned, that they cannot trust fiat currencies as a long-term store of value.”
The US dollar is only 150 years old (it celebrated its birthday last month). It’s just another in a long line of paper currencies, many of which have seen their value dwindle to nothing. You have to make some heroic – dare I say, irrational – assumptions to believe the same fate couldn’t befall the dollar (or the euro, or sterling), at some point. That’s why holding part of your portfolio in gold is perfectly rational.